Pillow Fights at the Four Seasons

ISADORE SHARP had a different coda in mind for the twilight of his career.

The 77-year-old founder and C.E.O. of Four Seasons Hotels and Resorts, he was looking forward to some time with his wife, sons and grandchildren. A meticulous planner, he was carefully plotting his exit, and in 2007 he engineered the sale of the company, which manages more than 80 luxury hotels around the world, to two of the world’s richest men, Bill Gates and Prince Walid bin Talal, a nephew of the king of Saudi Arabia.

But instead of victory laps and Champagne farewells, Mr. Sharp is now coping with a vicious, industrywide slump. A huge chunk of business for the upper-crustiest hotels came from financiers, many of whom have either been fired or shamed into the Econo Lodge. And not many tourists want to drop $395 for a room these days.

Four Seasons has hardly escaped the pain.

“Our results are going to be seriously impacted,” Mr. Sharp says. “Now is the time that management skills will be tested.”

An earnest and imperturbable man in a white button-down shirt with gemstone cuff links, Mr. Sharp is sitting in an upholstered chair in a corner of his large office at company headquarters here in Toronto, the city where he was born and has worked his whole life. The son of Jewish immigrants from Poland, he opened the Four Seasons Motor Hotel in a seedy section of Toronto in 1961, and from that rather mundane start, built one of the best-known prestige brands in hospitality, known for spare-nothing service and very good pillows.

This might surprise even its longtime guests, but Four Seasons — the company, that is — doesn’t own hotels. It operates them on behalf of real estate owners and developers, who typically call this office in Toronto with nothing but a patch of land and a checkbook. Four Seasons participates in the design of the property and runs it, with nearly total control over every aspect of the operation, from the number of bell staff to the thread count of the sheets.

For its efforts, the company generally earns 3 percent of the gross and approximately 5 percent of profits, and owners must also chip in for chainwide funds for global sales, marketing and reservations. Separate accounts are typically set up at each hotel as reserves to cover upkeep. These are high numbers, and because Four Seasons staffs properties with more bodies than rivals do, profit margins at its hotels are relatively low.

In good times, owners didn’t mind because a Four Seasons has historically been a sterling asset — a terrific piece of collateral if you need a loan, a lucrative bauble if you want to sell. But these aren’t good times. Four Season owners in distress have been calling and pleading: Cut the payroll. Easy on the fresh flowers. Drop room rates to stoke traffic. Pretty please?

Good luck, though, talking Mr. Sharp and his retinue into cutting anything. The company is legendarily unmovable when it comes to its standards and, until late 2008, it wouldn’t budge on prices. The first priority of Four Seasons is “the sanctity of the brand,” a phrase you hear a lot from people both inside and outside the company. It worries more about the collective image of the chain than the fate of an individual owner.

So those owners, when pinched, are in a nightmarish bind. To make their mortgage payments, they need the kind of invasive surgery that most companies routinely perform on themselves. But by contract, they can’t touch the scalpels.

And there is a built-in limit to how confrontational owners can be. Yes, it’s their building and, yes, technically speaking, Four Seasons works for them. But if relations get testy, those mild-mannered ladies and gentlemen in Toronto won’t say anything as uncouth and direct as “You probably should not mess with us.”

They don’t need to.

“They manage all aspects of your operations and that gives them significant leverage, if they choose it,” says Hushmand Sohaili, a lawyer for a Four Seasons owner in the midst of what he called a delicate negotiation with the company. “They train your employees, book your bookings, they do everything. They make it clear that it is in your best interest to not oppose their plans.”

OF course, when its hotels suffer, Four Seasons suffers, too. Revenue per available room — the industry’s major index of fiscal health — is down about 25 percent at Four Seasons hotels so far this year, Mr. Sharp says. For the first time in the company’s nearly 50-year history, staff members at headquarters have been laid off (about 10 percent of 400 employees).

Photo

Prince Walid bin Talal and Bill Gates bought the Four Seasons company in 2007, for $3.8 billion. Were doing it for profit, the prince said. But we have to face reality. The world is in a recession. But it will be over in a year or two.Credit
Kingdom Holding Company, via Bloomberg News

There has been talk lately that both the prince and Mr. Gates are unhappy with their investment — the purchase price was $3.8 billion — and galled that the fat pipeline of future projects described when they bought is now a bit thinner. The pair own 95 percent of the company, in equal shares, and Mr. Sharp owns the rest.

Asked if he was getting grumpy about his investment, the prince replied “no, no, no,” during a recent phone call from Riyadh. “Look, we have not invested in this company for the ego,” he said. “We’re doing it for profit. But we have to face reality. The world is in a recession. But it will be over in a year or two.”

Mr. Gates had less to say. A staff member at Cascade Investment, his private holding company, asked that inquiries about Four Seasons be sent via e-mail. Nobody from the company responded.

Mr. Sharp says he chose his two partners because of their patience — and, for the foreseeable future, they are going to need it. Conditions in the industry are bad enough that some owners — none of them in the Four Seasons stable, so far — are just walking away from their mortgages and handing their keys to the bank.

“The problem is that nobody knows how to set the value of a hotel right now,” says Jeff Higley of Smith Travel Research in Tennessee. “Let’s say you bought a property for $100 million. Now all of a sudden, your net operating profit says the property is worth $60 million and you’re not getting the room rates you used to get. Well, you’re upside down. That’s why some companies are starting to see the wisdom of saying: ‘I don’t see it coming back any time soon. We’re just walking away.’ ”

Though no owners of Four Seasons hotels have gone that far, consultants say that several are in arbitration with the company, and one is in an open — and very noisy — revolt.

The nuclear phase of the Luxury Suite War on the California Shore began just before midnight on March 27, when several representatives of Broadreach Capital Partners walked down a flight of stairs at the Four Seasons Resort Aviara north of San Diego, seized some accounting ledgers and changed the locks on several offices.

Broadreach, which owns the Aviara, had been feuding with Four Seasons, which runs the property, over the hotel’s financial management. And a day after it grabbed the ledgers, it also terminated Four Seasons’ contract. But Four Seasons decided that it wouldn’t go quietly — actually, that it wouldn’t go at all.

Weeks of legal jousting ensued, and on May 11, the day that Broadreach’s newly picked managers were supposed to arrive, Four Seasons staff members set up checkpoints to keep them off the premises — to prevent what it called in a press release a “physical invasion.” Local television crews were soon swarming. (There’s just something irresistible about a story that involves barricades and beach butler service.)

“We couldn’t believe it,” Mr. Sharp says. “I heard about this whole thing and I thought, ‘What are you talking about?’ This is a business we’re running. This isn’t a third-world country.”

LEAVING at a moment as tense as this, Mr. Sharp has decided, is a bad idea.

“I’ll work for as long as I feel I can contribute,” he says. “What I don’t want to be is that superstar athlete who doesn’t know when to get off the court. My wife says: ‘Don’t worry. I’ll tell you.’ ”

If you expect a back-slapping smoothie, Mr. Sharp will disappoint. There’s something incongruously showbiz on this particular day about his tie, which is silver and covered in what look like Swarovski crystals, and his manners are impeccable. But he has the soft-spoken, low-key style of an undertaker. He projects the unneurotic air of a man who doesn’t feel compelled to impress.

A faintly messianic tone, though, creeps into Mr. Sharp’s recently published autobiography, “Four Seasons: The Story of a Business Philosophy.” That philosophy, it turns out, could have been dreamed up by a second-grader: build the sort of hotels that people would like and treat guests the way they would like to be treated. When he pitched this very basic variation on the Golden Rule to staff members, Mr. Sharp says in the book, the reaction was a lot of head-scratching — as though he had arrived at the office one day and announced, “From now on, we shall speak to our guests in riddles, dressed in ponchos.”

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The Four Seasons company is feuding with the owners of the Aviara resort north of San Diego.Credit
Sandy Huffaker for The New York Times

But while the concept is far from esoteric, the execution is singular. At Four Seasons hotels, they spell out your children’s names in chocolates, on plates in their rooms. They put limes and Valencia oranges in the gym water coolers. They buy the best televisions, and they assemble combinations of sheets, mattresses and pillows comfy enough to provoke an unbidden endorsement on Oprah Winfrey’s show:

Oprah: Favorite thing to sleep in for you?

Julia Roberts: A Four Seasons bed.

Oprah: Four Seasons’ bed is the only bed better than my own! “The guy has the hotel business in his blood, in his veins,” says Prince Walid, who called last week from Riyadh and talks so quickly that it’s hard to understand what he’s saying. “I read his book cover to cover and it’s Business 101. Some people need to make things complicated. Not Mr. Sharp. I love that.”

Four Seasons has been accused of a certain insularity and caution over the years, but it is renowned for the corporate pride instilled in its more than 30,000 employees worldwide. For 12 years running in Fortune magazine polls, it has been voted as one of the best places to work.

And though it has never been in the vanguard of design, unlike the Ritz-Carlton — which long put English hunting scenes and Persian rugs in every location — Four Seasons built with local architecture and styles in mind. In the 1990s, hotel consultants say, the Ritz and Four Seasons were locked in a Coke-Pepsi kind of competition and, by emphasizing uniform quality instead of uniform buildings, Four Seasons ended up gaining market share.

In the middle of a recent three-hour interview in Toronto, Mr. Sharp gave a tour of his headquarters, a sleek and modern structure that was originally a plant that manufactured Trivial Pursuit board games. Everyone here seems to have worked for the Four Seasons for at least 20 years; even the grayest of employees refer to their boss as “Mr. Sharp.”

The company cafeteria is called Thunderbird, a reference, Mr. Sharp explained over lunch, to the name that he originally wanted to give his company. Today, it’s hard to imagine a collection of luxury hotels bearing the same name as a vintage sports car and very cheap wine, but almost everything about the Four Seasons sounds a little far-fetched.

After studying architecture in college, Mr. Sharp joined his father’s construction business and, when he was in his early 20s, built a motel for a family friend. The venture seemed cockamamie, given the friend’s lack of experience and the motel’s out-of-town locale. When the project worked, he decided that he could do it, too, and he built in the only place downtown where he could buy a large plot — on a street known as the go-to place for prostitutes and drugs.

“People who came from out of town, they didn’t know Toronto,” Mr. Sharp explains. “What they saw was a charming little hotel, like an oasis, with a swimming pool, a courtyard. You create your own environment. It’s all in the way you market the product.”

The luxury concept didn’t occur to Mr. Sharp for years, after he had built a couple of successful hotels and was asked by an English developer to construct a property in London; it ultimately opened in 1970. Mr. Sharp argued that the place should compete with Claridge’s and the Connaught and other elite, old-world hotels.

That part of the market seemed crowded to Mr. Sharp’s overlords, but he had been to those hotels and here’s what he noticed: They treated you like royalty only if they knew you.

“If they didn’t know you and you walked in with blue jeans a regular shirt, you wouldn’t even get the time of day,” he said. “That was the difference.”

The luxury hotel for everyone else — it could have been the corporate motto. Given Mr. Sharp’s eagerness to go head to head with British swells, you would assume that class resentment was a motivator here. After all, the guy’s dad grew up penniless in Oswiciem, Poland — known better as Auschwitz — and his parents arrived in Canada with next to nothing. But class resentment, he says, is not in his psychological makeup.

Four Seasons began its transition into a management-only company in 1974, when cost overruns at a Vancouver property nearly led to bankruptcy. Mr. Sharp was hardly the first hotelier to run a property owned by someone else, but he says Four Seasons was one of the first operators to leave the real estate business altogether. The model eliminates all the costs associated with buying land and buildings and allows Four Seasons to earn money the moment the doors start revolving.

Dozens of deals would follow, and in 1986 the company went public. Until the current downturn, the bumpiest patch came after 9/11, when travel collapsed and Four Seasons refused to cut room prices, to the consternation of some owners. It would diminish the brand, Mr. Sharp argued, and once the rebound happened, make it harder to raise rates to original levels.

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Isadore Sharp, the chief of Four Seasons, in 2004. He opened his first hotel in a seedy section of Toronto in 1961, initially wanting to name it Thunderbird.Credit
Norm Betts/Bloomberg News

FOUR SEASONS considers it a measure of its responsiveness and flexibility that in late 2008 it gave some ground on prices, making it possible, for the first time, for customers to negotiate deals to buy two nights and get a third free.

But that’s a couple of Motrins to owners in need of heart paddles. It’s not easy to get those desperate owners to speak on the record, because there’s little margin in a public spat with the company that runs your multimillion-dollar investment.

Broadreach, of course, got past any such inhibitions. It sued Four Seasons in April in federal court in San Diego, contending that the hotelier had breached its fiduciary duty in their partnership, although it kept the particulars of those possible breaches vague.

Broadreach executives wouldn’t comment on the case, citing a confidentiality agreement imposed by an arbitrator, who heard arguments in the case in mid-June. But those court filings say a lot about the tenor of this brawl. Four Seasons, wrote the Broadreach lawyer William Brewer, “is trespassing on Owner’s real property and holding its Hotel business ‘hostage’ without any authority to do so.”

Mr. Sharp says the real problem is that Broadreach larded itself with debt, having refinanced the Aviara with a new mortgage not long after buying it. He notes that Broadreach is a majority shareholder in Dolce, the new management company it would like to install at the Aviara.

“Maybe they thought we’d buckle under poor publicity,” he says. “But our decision is that we’ll take this to the wire. We can’t allow people to sort of run amok.”

If Broadreach wants to terminate its contract, he adds, the company will have to pay Four Seasons damages that include the cost of negative publicity as a result of the Aviara hostilities.

The litigious approach obviously isn’t a shortcut when negotiating with Mr. Sharp. What works, says Laurence Geller, who owns two Four Seasons properties and some other hotels, is a compelling demonstration that whatever cuts you want won’t hurt the brand. You’d better bring numbers to back up your claim.

“Many years ago, I created this industrial engineering system for labor, which breaks all jobs into an hourly basis and is designed to minimize fixed costs,” Mr. Geller says. “It’s incredibly boring, this system. But I’ve used it to go to them and say: ‘Look, we can make these cuts without sacrificing standards — we did so elsewhere. Let’s try it. If guest satisfaction levels go down, we’ll undo the change.’ If you present facts and research, they’ll react well because they’re professionals.”

Mr. Sharp says that he will listen to any owner’s case, and that if the company says no, it has to have a reason better than “This is the way Four Seasons does it.” Just don’t expect special breaks.

“I met the other day here with one of our owners, and we talked about his issues, talked about what we could do about it,” Mr. Sharp says. “And I said, ‘Look, here’s exactly as far as we can go and here’s what we’re doing.’ You try to go as far as you can while recognizing you’re limited. We’re open, but there is a limit.”

You might wonder why owners would sign on the dotted line at the end of Four Seasons’ lengthy contracts — some of which stipulate deals that last as long as 60 years — if they aren’t ready to play by the company’s very strict rules. The answer, says Bjorn Hanson, who teaches hotel management at New York University, is that many prospective partners are focused on Four Seasons’ sterling reputation and their own experiences with the chain as guests — and less, unfortunately, on the specific business terms.

Troubles can arise once the money stops coming in, and the interests of management and owner diverge to the point where they conflict. Which might make the Four Seasons business model one of those ideas that seems brilliant in flush times and ill advised in bad. When the reservation lines go silent, owners will find that the company stops seeming like a bunch of charming sticklers and starts seeming like a virus that cares about self-preservation more than the well-being of its host.

AS ever, Mr. Sharp is taking the long view. He has run this company during plenty of recessions, and though none have been quite as severe as this one looks to be, he’s certain that it will pass in a matter of a year or two. At which point, the idea of a Luxury Suite War is going to seem pretty silly.

The prince agrees. “Of course this company has competitors, but barriers to entry in this business are very high,” he says. “It takes a lot of effort, a lot of perseverance and a lot of consistency to reach the stage that Mr. Sharp’s Four Seasons has.”